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Case study: Large UK financial services company

Chief audit executive

As a large UK financial institution that also operates in the EU, the bank is ensuring that it can preserve access to EU markets for its customers and clients. To do so, it has chosen to expand the range of activity undertaken in an existing licensed EU subsidiary, taking advantage of and building on infrastructure and regulatory permissions already in place.

Should the UK’s withdrawal from the EU result in a loss of relevant passports for the industry, this entity would be able to provide the bank’s clients with access to European markets, including intra-EU payments, lending and deposit-taking.

The entity is in the process of extending its operational license to cover the bank’s European activities. A new European Management Committee was set up to run this and to oversee a broad range of different products and services the Group offers across Europe. The organisation has sourced staff from across the Group to set up and support the European committee.

Implications for internal audit

Because the bank will be operating from another EU country, there are going to be direct consequences for the internal audit function. Currently the function audits its European locations from staff based in London with a small team based in the new hub, but it seeks to grow its European team and respond to the requirements of both local and European regulators. As such it has needed to provide clarity to the regulators on the future provision of internal audit services to its subsidiary. This has meant that the internal audit function has begun recruiting for roles and skill sets that are new to the location. It has been challenging to find senior staff who have the skill sets for future booked business but who are happy to join the company without a firm sense of exactly what business will be relocated.

For the wider organisation, changes were already made to people’s personal contracts due to ring-fencing reforms being implemented in early 2018 to ensure they can continue to work for the appropriate entity post-Brexit. Ring-fencing of day-to-day banking services was one of the reforms brought in by the UK government to strengthen the financial system following the global financial crisis. To reassure its employees’ concerns, the organisation issues regular updates on the bank’s latest Brexit developments.

Scenario planning

Given the ongoing uncertainty as to whether a legally reliable transition period will be in place when the UK leaves the EU next March, the bank has been implementing its contingency planning so as to be sure of being able to continue to service EU-facing customers and clients in a seamless way, whatever the outcome. The bank continues to monitor political developments as the UK and EU look to negotiate a future economic relationship for financial services. However, contingency plans do not make any assumptions that this future relationship will be any less limited than other third countries’ have today.

Steering committee

The bank set up a programme specifically in relation to the planning and preparing for Brexit and to coordinate the potential impact and the response the bank is taking. The programme reports directly into the Group’s Executive Committee and assesses the progress being made with applications for the necessary regulatory licensing requirements with the relevant authorities. The internal audit function receives weekly updates on the project status of the various work streams and any concerns raised by the different departments. It has audited the programme and monitored its developments continuously and will do so for the foreseeable future. In addition, a new steering committee is being set up by the bank’s risk function to oversee some of the more practical issues related to Brexit. Internal audit will attend all meetings to have oversight of key events and responses but to also raise questions and challenge assumptions and findings. The audit work undertaken so far has enabled internal audit to get a clear view of the bank’s preparations and has provided it with various opportunities to raise concerns with the appropriate people at different governance fora.

Due to the complexity of Brexit, senior management and the board have taken a strong interest in the bank’s preparations for the UK’s withdrawal from the EU. The audit function found that some practical elements associated with Brexit have become less risky as a direct consequence of senior management’s oversight and involvement.

Advice

For any internal audit function it is important to consider the implications of Brexit to its own activities. The bank’s function is now required to allocate more resources to its non-UK locations and is reviewing where its staff will be required to operate, how many additional resources are needed, to what extent it complies with different national regulations, and the effects on its audit budget. It stresses the need to be flexible to respond to shifting priorities and developments and to assure its time and focus is appropriately allocated.

Content reviewed: 2 November 2018